While the Federal Reserve took a significant step in September with a 50 basis-point interest rate cut, its first in four years, the path forward for the next year has remained murky.
Although the forecast for the Federal funds rate to the end of 2025 sits between 3.5% and 3.25%, according to the most recent ‘dot plot’ chart, which shows the views of Federal Reserve Committee, just six of the 19 individuals put their estimates in this range. When expanded to between 3.5% and 3%, 63% of members fit into the range.
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JJ Kinahan, CEO of IG Group North America, said: “A difference of 25 basis points can be significant for market outcomes. Last week, losing about one cut from the priced in forecast through 2025 triggered the biggest bonds rout in two years.”
The uncertainty has turned eyes towards the release of the Federal Reserve’s meeting minutes, which will be released today, three weeks following the decision made by the Fed, to gain a better understanding of how decision makers may be leaning. Fed chair Jerome Powell has remained guarded with his approach, emphasizing a “two-sided” economic outlook.
Decision-making for the Fed was also cushioned by a friendly set of US non-farm payroll data released last week, adding 254,000 in September, far beyond the consensus 140,000.
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“This imbues the latest FOMC meeting minutes publication with market-moving potential,” Kinahan said.
“If the central bank uses the narrative document to signal that it is not on dovish autopilot and stands ready to pivot, traders could trim interest rate cut expectations further. That might bode ill for stock and bond markets, while lifting the dollar.”
